Since the invasion of Ukraine in February 2022, oil prices have reached their highest levels for decades. This situation has prompted President Joe Biden’s administration to urge US producers and the Organisation of Petroleum Exporting Countries (OPEC) to step up production in order to stem a downward spiral in oil prices. However, Saudi Arabia and members of the OPEC+ group advocated the opposite strategy, cutting production when oil prices began to fall.
The US shale oil sector was the first to respond to President Biden’s call, according to Alex Kimani, financial editor for Oil Price. US Energy Information forecast that total US production would reach 12.61 million barrels per day in 2023, surpassing the record 12.3 million barrels per day recorded in 2019.
This week, US crude oil inventories rose by 3,026 million barrels, after falling by 4,382 million barrels the previous week. US crude production rose by 9 % on an annual basis, undermining OPEC’s efforts to keep supplies low in order to influence prices. Indeed, Saudi Arabia is planning a one million barrel per day cut in production in July, in addition to new efforts by OPEC and its allies to limit supply until 2024 in order to stabilise oil prices, according to Reuters.
According to Bloomberg, and reported by Al Arab News, expectations point to a slower pace of growth in US shale oil, despite prices hovering around $90 a barrel, which is double the break-even costs for most domestic producers. Estimates say that if the trend continues, the world market could be deprived of additional barrels, which normally help to offset OPEC+ production cuts and the disruption to Russian supplies caused by the invasion of Ukraine.
According to Reuters, moderate increases in US oil production and cuts by the OPEC+ group of oil-producing countries could limit crude supplies in the coming months and push up prices. According to Ryan Lance, Chairman and CEO of ConocoPhillip (a US multinational specialising in oil extraction, transportation and processing), “rising costs, limited labour and equipment are among the issues that have hampered US producers’ efforts to ramp up production quickly”.
One of the main causes of the slowdown is that most US shale oil companies have shifted their focus from growth and expansion to greater capital discipline and returning more money to shareholders. According to JPMorgan, drilling and fracking costs in the US have fallen by 36 % since 2014, lowering the break-even point for many producers.
According to Al Arab News, the recent share of shale oil has struggled to increase production due to pressure from investors to increase yields and shortages of equipment, workers and capital. However, oil giant ExxonMobil is betting on hydraulic fracturing, a new technology that could allow shale oil producers to double production from their existing wells. According to their CEO Darren Woods, there is “a lot of oil left in the ground” that this technology could make profitable. Fracking is a process designed to reactivate a well after an initial period of production and can restore productivity to original levels as well as extend the life of the well. According to COO Garrett Fowler, the hydraulic fracturing system could be up to 40 % cheaper than a new well and deliver two to three times more oil than older wells.
While this new technology seems to be a good solution given the current inflationary environment, the price of barrels of shale oil remains lower than the price of oil set by Saudi Arabia. The latter has reported that the price of oil must at least be set at $81 a barrel if this year’s budget targets are to be met.
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